Description

“Steal a man’s wallet and he will be poor for a week. Teach a man to collect silver coins and he will be poor for the rest of his life”

I don’t think there has ever in history been a prolonged period where there was a shortage of physical silver. That doesn’t stop coin collectors from buying silver eagles as a store of value, often paying huge premiums over spot silver. The premium on a random year Silver Eagle coin (1 Oz of silver, worth $24) on JMBullion.com currently sits at $19, down from $21 a few weeks ago:
https://www.jmbullion.com/american-silver-eagle-varied-year/

Where the coin collectors squander money on those premiums, someone else stands to benefit. That someone is A-Mark Precious Metals (AMRK). AMRK is the largest wholesaler of physical gold and silver in the US. Over the last 3 years they have expanded into the retailing of precious metals, thereby greatly improving their moat, margins and return on capital. I believe their >25% ROE is more sustainable than the market seems to think. I think AMRK can continue to grow their retail business internationally and that 6x 2023 P/E for a combined financial/retailer with >35% market share is a steal. I also think that demand for precious metals has been subdued from 2014-2020 and that we are in a multi-year upcycle for precious metals demand.

The case for M&A

AMRK was the subject of to 2 prior VIC writeups. The last writeup in 2019 by Kruger does a good job explaining the dynamics of the business. At the time of the 2019 writeup, AMRK was struggling with the integration of GoldLine, their first venture into retail. Integration of GoldLine took a little longer than expected, but has now been fixed.

Since then, AMRK has largely transformed through the acquisition of JMBullion. In typical AMRK fashion they acquired JMB in various steps. The first stake was acquired in Sep 2014. This was increased to 20.5% in Oct 2016 and to 100% in March 2021. The final transaction was at a valuation of $174m. JMB is the largest precious metals eCommerce platform in the US, with a market share of ~33% at the time of acquisition. At the time of acquisition, the US market was split roughly 1/3^rd JMB, 1/3^rd Apmex, 1/3^rd all the rest.

Because PM retailing makes most of its money in periods where silver coins are in short supply, combining product availability with consumer relations is extremely valuable. That’s it. That’s the key to the thesis. Combine product availability and consumer relations, and you will earn high returns on capital.

Independent retailers can only source their precious metals on the open market , while AMRK can source product on advantageous terms from either sovereign mints or its own mints, and therefore has some of the best product availability.

AMRK is 1 of the 10 authorized purchasers of the US Mint, and an official distributor for various other sovereign mints (Canada, UK, Australia, South Africa, Mexico, China). The US Mint does not currently accept other authorized purchasers. A-Mark sells 30-40% of the gold bullion and 20-30% of the silver bullion that the US Mint produces. At JMBullion.com, a random year silver eagle sells at $19 over spot. The US Mint sells their eagles at a $3 premium to AMRK. So AMRK pockets $16 per silver eagle, which it splits over its wholesale business and retail business. To be sure, those premiums are some of the highest they have ever been, with normalized premiums on eagles being lower than $10. At the same time, there is no indication that the shortage of eagles will abate any time soon.

AMRK also owns the Silvertowne Mint and 44.9% of the Sunshine mint. Both have been ramping up production and the Silvertowne Mint is currently producing 1m Oz per week. Silvertowne rounds are currently selling for a $5-6 premium over spot, which AMRK splits over their mint, wholesale and retail. Sunshine provides the US Mint with blanks. Interestingly, the availability of blanks is often blamed as the reason of supply shortages. AMRK would point out that the real bottleneck is with the US Mint’s ability to process the blanks, and that the US Mint would source their blanks elsewhere if that was the real bottleneck.

So AMRK has product available through its own mints in combination with their agreements with sovereign mints. They have consumer relations through GoldLine and JMBullion in the US. They have also recently acquired Silver Gold Bull, a Canadian PM Retailer, and a 25% stake in Atkinsons Bullion & Coins, a UK based retailer. It seems clear they want to repeat the US playbook internationally.

Supply / Demand

Needless to say, AMRK’s position as authorized purchaser at the US Mint is extremely valuable in times of product shortage.

Demand for gold and silver coins is volatile and can change on a whim. The most recent surge in demand came in March of this year after the panic caused by the SIVB blowup, and high demand was sustained thereafter when the US debt ceiling dominated the headlines.

Supply of silver coins by the US Mint has historically been slow to respond to increases in demand. Unlike the Royal (UK) Mint and the Royal Canadian Mint, the US Mint does not have a commercial mandate. The US Mint exists to provide the American people with coins, both ordinary coins and collectible coins. The US Mint loses money on every penny, nickel or dime it makes, but makes money on higher nomination coins or precious metals collectibles. But maximizing their earnings is just not the reason they exist.

The US Mint is an inefficient government institute. Similar to other industries, they are facing a continuous labor shortage and have to prioritize the production of pennies, nickels, dimes and quarters over the production of collectibles. Apparently there is a shortage ongoing in ordinary coins, made worse by the digitalization of money. That last bit felt counterintuitive, until I realized that every coin I receive nowadays goes straight into a jar, never to be used again. The obvious solution of course would be to stop producing pennies, but that does not seem to be on the agenda at the moment.

As an anecdote on how inefficient the US Mint is: in 2022 they hit the borrowing limit on their credit line. Since business was booming, a commercial business would have gone back to the bank and expanded the borrowing capacity. This would have required congressional approval. Instead, the US Mint chose to lower production to remain within its limits.

In other words, AMRK might be slightly overearning, but the general shortage that we have experienced over the last 3 years seems unlikely to be resolved in the near term. Meanwhile I’m keeping a close eye on the US Mint production figures to see if production does ramp up at some point:
https://www.usmint.gov/about/production-sales-figures/bullion-sales

Valuation

AMRK trades at 2.3x tangible book, which translates to 6x P/E due to its 40% return on tangible equity. Personally, I am satisfied with a qualitative argument on why AMRK’s moat should provide it with high returns on capital going forward. However, part of the reason why this opportunity exists is because the market doubts the sustainability of today’s earnings and rapid rise in margins. It is impossible to value AMRK using margins from the 2014-2019 period, because the nature of the business has changed over the last 3 years. The combination with retail should bring persistently higher margins.

There are a couple of ways how you can sanity check the valuation. AMRK will tell you to look at the margins of the last 3 years, remove the 3 best quarters, and use this as run rate margins. This would roughly get you at 1.5% GP Margin on wholesale and 8.4% margins on retail. Applying this to TTM Revenue gets you $250m in gross profit. Subtracting $75m SG&A and 25% tax (interest expenses were roughly offset by income on the secured lending business, even though AMRK is shrinking this business) get you to $130m in ‘normalized’ earnings or 7x P/E.

Another way is to say that in 2022, AMRK transacted 104m Oz of silver wholesale and 27.7m Oz retail. Of the wholesale ounces, about 30% is ultra-low margin trading revenue. The other ~70m Oz is made up of allocations from sovereign mints, Silvertowne Mint (maybe 30-40m Oz in 2022, but going at a run rate of 50m Oz at the moment) and Sunshine Mint (the manufacturing margin is equity accounted, but AMRK purchases most of their product and earns a wholesale and retail margin). Look up the current margins on JMBullion.com ($19 on eagles, $8 on maples, $6 on silvertowne rounds), cut them in 2 to be conservative, add $30m for the gold business (gold is bought at a 3.0% premium to spot and sold at a 3.5% premium to spot on 3m Oz @ $2k / Oz) and you will also end up around $250m in Gross Profit. The difficulty with this method is that I’m mixing low margin bars with higher margin coins.

So the thesis is: wait for AMRK to buy more precious metals retail platforms internationally, and repeat their US playbook where they combine product availability with consumer relations. In the meantime, let them repurchase their own shares at 6x P/E. As AMRK continues to put up strong quarters and signals the sustainability of their earnings through repurchases and recurring dividends, there should be a bit of a rerating. Based on commentary from management, the end game is probably to wait for the next bull market in precious metals and sell out to another financial who will probably trade at a higher multiple and will have a lower cost of capital, so that would be instantly accretive.

While the last quarter showed $1.53 in EPS, which I annualized to get us to the ~6x P/E, it’s important to note that most of those earnings were booked in March. Premiums on silver eagles peaked at $21 and are now at $19. In other words, the current run rate of earnings is much higher than the ~$1.53 booked in March.

Some loose ends

• AMRK is bullish on the structural change in consumer demographic. They used to sell to Fox news watching boomers from fly-over states. They now increasingly sell to a younger demographic, part of which moved from buying bitcoin to buying silver and gold coins. I am less convinced that this expansion of demographic is structural, and that this newer demographic won’t just move on to the next hype.
• AMRK acquired 44.9% of the Sunshine Mint in 2020. Sunshine provides the US Mint with blanks. Interestingly, the availability of blanks is often blamed as the reason of supply shortages. AMRK would point out that the real bottleneck is with the US Mint’s ability to process the blanks, and that the US Mint would source their blanks elsewhere if that was the real bottleneck.
• AMRK has frequently hinted that they have more M&A in the pipeline.
• AMRK is very tight-lipped about the real economics of their business. Rightfully so: if you are the prime beneficiary of government inefficiency you don’t want to draw any unwanted attention to your business. I think most numbers here are directionally correct, but please share if you believe I am off somewhere on my estimates.
• AMRK initiated a $0.20 quarterly dividend (2% yield) in 2022, after having paid special dividends for some years. AMRK did 9.8m USD of buybacks during Q3 2023 and recently expanded the buyback authorization by another 1m shares.

Catalyst

International M&A

Further returns of capital